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Diamond is thinking of dropping Product Line C because it is reporting an operating loss. Assuming the company drops Product Line C and does not replace it, pre-tax operating income for the firm will likely:

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jepessoa

Answer:

Assuming the company drops Product Line C and does not replace it, pre-tax operating income for the firm will likely:

  • decrease by $1,500

Explanation:

Since no information was provided, I looked for a similar question:

Item                         Product Line A Product Line B Product Line C

Sales                          $30,000 $45,000                  $12,000

Variable costs           $18,000 $24,000                  $7,500

Contribution margin   $12,000 $21,000                  $4,500

Fixed costs:    

    Avoidable                    $4,500           $9,000                  $3,000

    Unavoidable            $3,000           $4,500                  $2,000

Operating income            $4,500           $7,500                    ($500)

total unavoidable fixed costs = $2,000 which will be allocated to product lines A and B

the financial disadvantage of dropping product C = $2,000 (unavoidable costs) - $500 (operating loss) = $1,500

D

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